The agricultural sector continues to face challenges with the global pandemic creating issues - just like it has for many other sectors throughout the New Zealand economy.
Whilst there are many external factors that are not within farmers’ control, such as the economy and the weather, there are things that rural businesses can do to be more prepared for the seasonal ups and downs that farmers face.
Managing and monitoring cashflow
Being able to monitor cashflow is crucial for any business. It is essential that as a rural business owner you know what is happening with your cashflow and what is likely to happen in the future at all times. Because of agriculture’s seasonal nature, and the scale of operations, most farming businesses require a line of credit, such as an overdraft, and other lending to successfully run their business. Well managed cashflow monitoring reduces risk for banks and other lenders and often leads to better lending terms for the borrower.
How to manage your cashflow
One of the most important things that rural businesses can do is actively track your financials and monitor, each month, income and expenditure. There are a number of online accounting platforms that can assist with keeping track of what is happening in your farming business. These include Cash Manager, Xero, MYOB, Figured, Farmax and Bank Link amongst others. In addition, programs such as Microsoft Excel can also be used for producing cashflow forecasts and budgets.
Updating your cashflow forecast
It is important to continually update your cashflow forecasts, particularly as commodity prices are volatile and income is likely to need revising at various points during the season. A successful cashflow budget will have columns for each month of the year and rows to show each type of income and expense that relates to the farm business. There should also be an opening and closing bank balance each month and this assists with seeing what the seasonal peaks in the overdraft are likely to be.
Where to get help
Your farm accountant and bank manager will be able to assist with your cashflow forecasting. If you don’t use online software your accountant generally will and they should be able to provide an actual cashflow statement for the previous season. This is always a good starting point for producing a forecast for next season. Your annual financial accounts can be used to back up your forecast to see how realistic the cash result will be. It is important to include things like income tax, asset purchases, living costs and other personal items such as school fees and life and medical insurance. All of these factors have an influence on the cash result for your business.
Working with your bank
There has been a shift in focus over a number of years to ensure that banks are lending responsibly and that farmers have good strategies in place to deal with the seasonal and cyclical nature of farming. Years ago banks did not necessarily require principal repayments on loans straight away but nowadays it is important that you are able to show the ability to pay back principal and interest from the start of any loan.
Dairy farmers can be well pleased with the results of the latest global dairy auction where prices across the board leapt an incredible 15%. This is the eighth increase in a row and the eleventh increase out of the last twelve auctions. Last month Fonterra lifted its 2020/21 forecast Farmgate milk price by 20 cents to between $6.90 and $7.50. After the latest dairy auction this is likely to increase further. For dry stock farms prices are holding up surprisingly well considering Covid and export issues. The global demand for food is set to continue, and while there are plenty of issues ahead, farmers who are able to monitor and keep a close eye on their farm finances should be able to weather any storm that comes their way.
Cheyne Waldron is a director of Bailey Ingham Ltd, Chartered Accountants, Otorohanga, Te Awamutu and Taumarunui